(Bloomberg) -- A dealmaking rebound has long been on Wall Street’s lips, but it’s bankruptcy and restructuring that’s proving to be an unusually persistent moneymaker for boutique advisers.
There are signs that work helping firms with everything from discounted bond buybacks to creditor disputes will hold steady even as mergers and acquisitions come back, an unusual coincidence down to new drivers.
“This restructuring pipeline, by the way, I think everybody’s been saying it feels extended,” said Ken Moelis, the chief executive officer of New York-based Moelis & Co., on his company’s earnings call on last week. “It feels like there’s just so much paper out there.”
The value of restructuring transactions involving Lazard Inc. rose 75% to $177 billion in the three months through June from the same period last year. Houlihan Lokey Inc., meanwhile, had its second-highest ever haul of restructuring revenue for that period. At Evercore Inc., it’s likely to be at a “healthy level for quite some time,” CEO John Weinberg said last week.
The boom in restructuring helped advisory firms consistently beat analysts’ expectations across the board last quarter. It’s a sign that thorny financing questions facing boardrooms are far from over, even as costs may have peaked with the Federal Reserve hinting at lower interest rates later this year.
“While we don’t see a watershed event and bankruptcies on the horizon, more and more we see opportunities to assist clients with complex and stressed financing situations, as well as with more proactive maturity management,” Andrew Bednar, the chief executive officer of Perella Weinberg Partners, said on an earnings call Friday.
Despite the ongoing economic strength in the US, Chapter 11 cases have increased and the number of weaker companies not making their debt payments is rising as corporates struggle to match their assets to their liabilities following rapid rate increases.
Default rates jumped to 3.1% for US high yield and 6.1% for leveraged loan issuers in the first half, strategists Corry Short and Bradley Rogoff at Barclays Plc wrote in a note this week, citing data from a unit of Moody’s Corp. That’s an increase of 1.2 and 3.9 percentage points, respectively, from the end of last year.
Major ongoing restructurings include bankrupt crypto exchange FTX, which has so far earned legal and financial advisers more than $600 million. There’s also seafood chain Red Lobster and private hospital group Steward Health Care System.
Investor protections
Restructuring advisers are also benefiting from the erosion of investor protections that bond and loan buyers agreed to during the easy-money period.
That’s leading to more so-called “creditor-on-creditor violence” as companies exploit loopholes in agreements to raise new financing, often at the expense of a group of existing lenders. Such transactions rely on advisers, including investment banks and law firms.
One recent example is Clearlake Capital Group-backed Valcour Packaging, which makes bottle caps under the name MRP Solutions. The firm cut a restructuring deal with more favorable terms for a group of negotiating creditors that agreed to provide $110 million of fresh capital while other creditors who don’t participate will be pushed down the repayment pecking order. Valcour is working with Evercore, while a group of creditors tapped Perella Weinberg Partners.
It’s a trend that’s likely to continue, with almost $2 trillion of bonds issued by US corporates alone coming due before the end of 2026, many of them with weak covenants — the agreements that set out protections for bond investors.
On an earnings call this week, Paul Taubman, the chief executive officer at PJT Partners Inc., said “stripped-down covenant packages” offer opportunities to be more creative with restructuring and recapitalizing balance sheets. Restructuring revenues are set to closely track last year’s record at PJT, he added.
Seeking to refinance debt through discounted bond buybacks and other liability management measures have also become a key play for firms.
“We have diversified the business to cover both creditors and debtors and to expand beyond restructuring into liability management,” Lazard Chief Executive Officer Peter Orszag told analysts last week. “That is where more of the activity going forward will be.”
The earnings power at present can also be seen in the average revenue for each managing director in the past 12 months. At Houlihan Lokey, the figure was $9.2 million in its restructuring division, compared with $5.5 million per managing director in corporate finance.
Further down the line, technological disruption from artificial intelligence and the growth of—and fights in—the booming world of private credit are set to keep those advisers’ in-trays full.
Private credit lenders got a taste of more aggressive tactics in the case of Pluralsight Inc., which saw sponsor Vista Equity Partners shift assets away from direct lenders in order to raise fresh financing. While the theory goes that restructuring negotiations may be easier with just a small group of private lenders, advisers are still spying opportunities to offer their services.
“The idea that somehow a bunch of lenders can, amongst themselves, just figure out how to restructure commitments that have been made with borrowers—without there being various stakeholders, who have different perspectives and need expert advice and capabilities—we just don’t buy into,” said Taubman.
--With assistance from Libby Cherry and Jonathan Randles.
(Updates with comments by Perella Weinberg CEO in sixth paragraph.)
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